Shares Investment Malaysia Edition Issue 20

ISSUE 20

05/10/09 - 08/11/09

OTHER FEATURES

Impact of Khazanah divestment in its controlling PLCs What's next for Proton?

Astro's profit affected by content costs ISSN 1793-7280

PP 14523/03/2010(023784) • MICA (P) 025/04/2009

Uncover the secrets to your wealth ™

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CONTENTS

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Issue 20

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05 Oct - 08 Nov 2009

Budget 2010 will be tabled on Oct 23 and analysts are mixed in their expectations of what is in store.

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PERSPECTIVE p6

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FEATURES

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Budget Wish List

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Khazanah To Sell More?

p8

Are Regional Markets Peaking?

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Trading Opportunities Amidst Mixed Signals

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NAP And Proton

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What A Company’s Financials Can Tell You As An Investor

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Between Continuity And Growth

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Content Cost Eats Into Astro’s Profit

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Mary Chia’s Beauty Regime

Information in this guide has been obtained from sources believed to be reliable. However, its accuracy or completeness is not guaranteed.

While every precaution is taken to ensure accuracy, the publisher accepts no liability for any error which may arise.

The articles are based on the opinions of the various authors and do not represent the opinions of this publication and/or the opinions of the organisation he/she represents.

In no event is SHARES INVESTMENT liable for all and/or any direct or indirect loss arising from any use or any reliance of any information provided.

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All materials printed in SHARES INVESTMENT are protected under the copyright act. All rights reserved. No part of this publication may be reproduced in any form or by any means without the written permission of the publisher.

Information in the publication should not be taken as offer/ advice to buy or sell securities.

We, our associated companies and / or their officers, directors and employees may own or have positions in securities mentioned in the publication, and may from time to time, add on to or dispose of such securities.

10/1/09 11:21:27 AM

REGULARS

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Phan Tjun Sern Lew Poh Chan Dr Ho Kah Leong Sang Ah Kew Clement Kan Stephen Chin Aw Jie Sheng David Chung Donavan Lim Lai Wyai Kay Lee Szu Yung Soo Yin Ling Xavier Lim Catherine Mak Choo Ai Loon Yong Chia Win

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Performance of Recent IPOs

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S. Krishnamoorthy

Discount to NAV

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Clay Foo

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• editorial desk •

B

udget 2010 will be tabled by Prime Minister-cum-Finance Minister Dato’ Seri Najib Tun Razak on 23 October.

Given the current economic situation, analysts are not expecting much in terms of goodies for the man in the street.

The tobacco industry is bracing itself for a hike in excise duty – partly due to the country’s dwindling coffers and the Ministry of Health’s determination to discourage smoking.

News reports quoting various ministers touting the positive impact of earlier fiscal stimulus packages and a slowdown in the pace of recession and unemployment figures suggest that another big stimulus is unlikely to come.

All eyes are then on the upcoming review of the National Automotive Policy (NAP), due to be unveiled in conjunction with the Budget. The government has to find a balance between attracting foreign direct investments and protecting the local automotive industry, particularly Proton.

Proton has enjoyed a long spell as the dominant player in the local automotive market due to tariffs and duties that make non-national cars more expensive than Proton cars. Its position is under threat due to competition from second

national carmaker, Perodua, and the ASEAN Free Trade Agreement due to come into effect on 1 Jan 2010.

While protecting Proton, the country inadvertently made Thailand Asia’s automotive hub, with its more accommodative policies. The NAP has a tough job to entice global players and still keep Proton safe and viable.

Previous attempts to “rescue” Proton, such as a strategic partnership with Volkswagen have fallen through due to objections from major shareholder, Khazanah Nasional. Several parties also indicated an interest in acquiring Khazanah’s stake in Proton, believing they can do a better turnaround job. Meanwhile, Proton did a decent job on its own, surprising analysts with a strong performance in 1Q10.

Khazanah has been resistant to reducing its stake in Proton. However, its recent move to pare down its shareholding in Malaysia Airports prompted speculation on the possibility of more such sales.

Read more about the Budget, Khazanah and Proton inside. Meanwhile, let us keep our fingers crossed for a Budget that exceeds our expectations and sparks a bull run.

Happy investing!

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Perspective text : Stephen Chin

BUDGET WISH LIST

B

udget 2010 will be tabled on Oct 23 and analysts are mixed in their expectations of what is in store. Shrinking coffers due to previous budget deficits and a contracting economy have reduced the prospect of goodies but hope persists that more will be done to stimulate the economy.

Government revenue this year is forecast to drop to RM160b from RM175b last year, said Second Finance Minister, Dato’ Seri Ahmad Husni Hanadzlah. “Exports have dropped by an average of 20% this year. Production is lower and so is tax revenue,” he said.

The government is also revising its economic forecast of a 4%-5% contraction for 2009, and is announcing this at the tabling of Budget 2010.

Ahmad Husni said the government is aiming to reduce its budget deficit to below 7.6% of GDP, partly by slashing 15% off its operating expenditure next year.

He said the government would only spend on “abso-

lutely necessary” overseas trips and only two assistants will accompany ministers abroad.

The goods and services tax (GST) is not likely to be introduced yet as “we are seriously studying the impact.

We do not have a timeframe for implementing that,” he explained.

Citibank economist Kit Wei Zheng said, given the political difficulty in implementing GST even during good times, it remained to be seen if it would be feasible in a post-crisis world of slower growth.

The Edge Financial Daily wrote that the government may instead broaden the scope of the existing 5% service tax to include certain services provided by financial institutions, such as safety boxes, chequebooks, mortgage insurance, bank drafts, Internet banking transactions and processing of bank statements.

It added that this would help educate the general public of the service tax platform before GST is implemented.

Taxes may also be imple-

mented on certain services such as Internet cafes, bridal galleries, photo shops and car wash operators, it reported.

The government could also abolish or reduce the sales threshold for service tax collection, which means service tax is applied regardless of the revenue the businesses generate.

AmResearch said the tobacco industry is unlikely to be spared from increased excise duty. Tobacco manufacturers would take the opportunity to raise its margins by passing on higher costs to compensate for shrinking sales volume.

The industry is flexible enough to adapt to changes, it added, but a significant rise of more than 3 sen per stick would invariably lead to a rise in illegal and extremely lowpriced cigarettes.

Maybank Investment Bank concurred. Tobacco consumption remained resilient and

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government collection from excise duties grew 18.8% in 2008. “We expect a hike of at least 11% or 2 sen per stick to 20 sen per stick. It could be higher if the government simplifies the masses of duties and taxes on cigarettes in view of upcoming ASEAN Free Trade Agreement statutes that will result in lower import duties.

OSK Research added that an increase in tobacco excise duties is expected because the Ministry of Health plans to curb smoking via high product pricing. If this happens, prices would rise and in turn crimp tobacco consumption volume.

“BAT will be the most impacted by this move given its high industry market share of 54.7%. However, JTI should fare well as its constant growth in market share terms should do well and support earnings growth,” it said.

Citibank’s Kit said raising corporate and personal income taxes would erode Malaysia’s competitiveness.

However, the Budget may include a cut in subsidies to cut costs. It would be politically difficult, if not impossible to cut wages or reduce headcount for more than 1.1m civil servants, he added, although wages represent 26.7% of the government’s total operating expenditure.

The Malaysian Estate Owners Association (MEOA) has three main items on its wish list. It is asking the government to make biodiesel uses mandatory to boost palm oil prices; abolish the wind-

The government is also revising its economic forecast of a 4%-5% contraction for 2009, and is announcing this at the tabling of Budget 2010. fall tax; and improve basic infrastructure (such as port facilities and roads) in Sabah, where more than 30% of the country’s total planted oil palm area is located, making it the largest in the country.

MEOA president Boon Weng Siew lamented that the plantation industry’s proposals for the Budget was not given due consideration in the past. “It is hoped that MEOA’s proposals for Budget 2010 will be given the attention the industry deserves, as one of the strong pillars of the national economy and one of the top three in terms of export earnings,” he said.

The Associated Chinese Chambers of Commerce and Industry said the Budget should include attractive incentives to prompt small and medium entrepreneurs (SMEs) to venture abroad.

“Financial and non-financial assistance should be given to upgrade SMEs and enable them to explore avenues in other regions,” said Dato’ David Chua, the chambers’ secretary-general.

OSK Research associate director Chris Eng said they do not have big expectations for the Budget, except for the government to announce at least one big project. He added that the Budget is also likely to focus on the National Automotive Policy (NAP).

The three-year-old NAP had been under review and

the results are expected to be unveiled together with the Budget. According to an OSK Research report, industry sources hinted that the policy will be tweaked to lure investments in the form of R&D by providing incentives for home-grown models from national and non-national automakers.

This would liberate the sector and rev up the value chain of the country’s ailing auto industry, it said. “In competing head on with Thailand, we see possible incentives such as tax holidays on export duties and corporate income,” it said.

“We could see major automakers setting up full-fledged manufacturing lines and establishing an R&D centre, thus benefiting existing completely knocked down (CKD) assemblers such as the Naza Group, UMW-Toyota and Honda Malaysia, given their existing tie-up with local franchise holders.

“Setting up such R&D plants is unlikely to be immediate, thus Proton can take advantage by providing research and engineering services to these potential candidates,” it said. Proton’s ample plant capacity can also be used as an immediate platform.

Other beneficiaries would be OEM auto parts suppliers such as APM, EP Manufacturing, Ingress and TSM Global, it added.

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Perspective text : Stephen Chin

KHAZANAH TO

SELL MORE?

K

hazanah Nasional Bhd sparked some speculation over its plans when on 10 Sept, 2009, it sold a 5% stake or 55m shares, in Malaysia Airports Bhd. The market is guessing which investee company whose stake will be sold next, said OSK Research in a report.

“Given the Prime Minister’s

call for the government to gradually pare down its stakes in government-linked companies (GLCs) to increase liquidity, we would not be surprised if there are more stake sales,” it said.

In a policy speech on 30 June, Prime Minister Dato’ Seri Najib Tun Razak said there should be a more optimal and balance co-existence between GLCs and non-GLCs, where

GLCs would need to divest non-core and non-competitive assets.

Other government investment institutions such as PNB and EPF may sell down their respective stakes too, OSK Research noted, but these institutions generally adopt a more active trading position compared to Khazanah, which is generally a strategic investor.

Inv as

Sou

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AmResearch said Khazanah may continue reducing its stakes in GLCs to create liquidity in the market. It could afford to reduce its shareholdings and still hold strategic stakes.

It added that the local market has been on a steady upward trend since March in tandem with the global equity rally, but still lags all other regional exchanges. Part of the reason was attributed to a lack of liquidity in the market.

Jupiter Securities head of research Pong Teng Siew said that Khazanah could use the funds to take up strategic stakes in government-led funds such as Ekuiti Nasional Bhd (Ekuinas) which was set up to nurture

Investment Holding Structure as at 31 August 2009 Source: Khazanah Nasional

companies.

Khazanah also has the option to venture overseas or strengthen its positions in profitable ventures such as healthcare, he added.

OSK Research said Khazanah would have to consider several factors before reducing its stakes in GLCs. “It is less likely to cut its stake if it holds less than 50%. It is unlikely to pare down its stake in subsidiaries such that its shareholding would fall below 50% in the companies, or below 20% in its associates.

“It is also less likely to reduce its stake if the current share price is significantly below its original cost of investment. It will not likely sell if the company’s financial position is not solid or if it is loss-making,” it reported.

Based on these criteria, OSK Research concluded that Pharmaniaga, UEM Land and Malaysia Airports are the most likely candidates if Khazanah were to continue reducing its stake.

Although Khazanah holds more than 50% stake of MAS (indirectly, through Penerbangan Malaysia) and PLUS, it is unlikely to sell before MAS’s current share price is below the initial investment cost when Penerbangan Malaysia took over MAS’s assets and liabilities in 2002.

The government may privatise PLUS to prevent further toll hikes in the future. As such, a stake sale is not likely until the issue is resolved.

Khazanah has an 86.8% indirect stake in Pharmaniaga through UEM Group. UEM attempted to privatise the com-

pany in 2008 but the effort was reportedly scuttled by PNB’s rejection of the offer of RM3.61 per share. PNB holds some 8.9% shares indirectly.

“With Pharmaniaga not meeting its public shareholding spread, a paring down of Khazanah’s stake is almost a certainty,” OSK Research said.

Khazanah has a 77.1% indirect stake in UEM Land through the UEM Group. UEM Land is the developer of Nusajaya. “We believe Khazanah can afford to reduce its stake substantially.

The tripling of its share price since listing also gives it added incentive to sell,” it said.

After selling a 5% stake in Malaysia Airports, Khazanah still holds 67.7%. “There is really nothing to prevent a further paring down of its stake. Now that Malaysia Airports’ financial restructuring is completed and it is on a firmer footing, we may see more placements, especially to foreign longer term investors,” it added.

Khazanah has fewer compelling reasons to reduce its stake in its associates. Its investment cost in Proton and Axiata is significantly higher than current trading prices. The Time group of companies are not yet on firm footing, while foreign demand for TNB shares has been steadily declining since May 2007.

Its shareholding in Astro is close to 20% while its 27.2% stake in CIMB is considered a strategic shareholding. “While there is a possibility of a stake sale in associates, we are hard pressed to identify good candidates for such corporate action,” it explained.

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10/1/09 10:58:02 AM

Trend spotting text : Benny Lee

Benny Lee is a private trader and chief market strategist for the NextVIEW Group. The NextVIEW Group is a group of companies in the Asian region that provides a leading realtime investment tool for both professional and retail investors. NextVIEW is also a leading Investor Education training provider. For more information, log on to www.nextview.com.

ARE REGIONAL MARKETS PEAKING? FBM Kuala Lumpur Composite Index (FBMKLCI): Peaked at 1,230 points?

The stock market was given a boost when the FBMKLCI broke above the 1,200-point resistance level and went on to make a new high since 18 June last year at 1,231.49 points. However, the bullish momentum did not hold and the market pulled back to close at 1,217.39 points on 25 Sept.

The FBMKLCI increased

Resistance

46.3 points or 4% from last month. Surprisingly, the new high was created right after the holidays when volume was relatively low but recent reports from Bursa Malaysia showed that foreign participation in the local equity market slightly increased.

The technical indicators are still showing that the uptrend is still intact. Momentum indicators are still above their mid levels. However, there is a bearish divergence

between the index and the indicators in the long term and this indicates that 1,230 points may be the peak. In the near term, the benchmark index is expected to test the 1,200-point level and if it can stay above this level for awhile, a trading opportunity arises as we may see the FBMKLCI testing the 1,230 points level again.

If 1,200 points is broken, the index may find support at 1,160 points and if the market

Resistance

Support Support

Resistance Support

Weekly KLCI (left) and FTSTI (right) charts as at 25 Sept 2009 using NextVIEW Advisor

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Resistance Resistance

Resistance

Support

Resistance Support

Weekly HSI (left) and DJI (right) charts as at 25 Sept 2009 using NextVIEW Advisor

breaks above 1,230 points, it may test the 1,300-point resistance level.

FTSE Straits Times Index (FTSTI): Strong resistance at 2,700 points

The market faced heavy resistance whenever the FTSTI reached 2,700 points.

This level was tested four times in the past one month but failed to be broken completely. The last test was on 23 Sept and then the index fell for two days to close at 2,662.82 points on 25 Sept.

It was another yo-yo month for the Singapore equity market which has gone into a bullish trend correction since mid-August. The benchmark index was still able to end positively month to month with an increase of 44 points or 1.7%.

Technical indicators have been neutral for the past two months but are forming a divergence against the index.

The momentum indicators on the weekly chart seem to be more bearish. The market may have peaked at 2,700 points. The FTSTI has increased almost 80% from a low of 1,500 points in March.

If the index stays between 2,500 and 2,700 points support and resistance levels, the market is still in a correction. If the FTSTI breaks above the resistance level, we may expect the index to test the next resistance level at 3,000 points. If the market continues to fall and the FTSTI breaks below the support level, the index is expected to fall to the next support level at 2,200 points.

Hong Kong Hang Seng Index (HSI): Needs stronger catalyst

The market lifted the HSI to a new high since 13 August 2008 at 21,768.51 points on 17 Sept after breaking

the 21,400-point resistance level despite having weaker momentum in the short term.

However, the rally was not sustainable and the market immediately pulled back below the broken resistance level to close at 21,024.40 points on 25 Sept. Trading volume last month was relatively lower as investors were cautious in a market that almost doubled since the low in March this year.

The technical indicators especially momentum indicators are making new pivot lows, against the market trend which is making new highs. This simply means that the strength of the current uptrend is weak. The market needs really strong catalysts to push the market to make fresh highs.

Things would look bullish if the HSI can break above 21,400 points again and (Continues on Pg 12) 9

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Trend spotting

text : Benny Lee

Trading Opportunities amidst mixed signals Kuala Lumpur Composite Index Futures (FKLI)

Equity markets including Malaysia received a boost last month as investors and traders anticipated betterthan-expected economic and financial results. The FKLI broke the 1,190-point resistance level and rallied to as high as 1,232 points. I mentioned last month that a buy opportunity exists if the FKLI goes to the support level between 1,150 and 1,160 points. The FKLI did go to a low of 1,156 points and those

who went long at this level would profit handsomely in a month. The rally however was unable to last and the Sept futures contract pulled back to settle at 1221.50 points on 25 Sept.

The technical indicators are mixed. The FKLI is still in a strong uptrend supported by a 30-day moving average. The RSI indicator is still above the mid-level and this indicates that the bulls are still in control of the market.

However, the MACD indi-

cator has started to decline near its trigger line (nineday moving average). The Stochastic indicator shows that price was overbought and the decline below the overbought level of 70 shows that the market is reversing downwards in the short term.

The FKLI support level is currently at 1,190 points, defined by the 30-day moving average and the uptrend line since April this year. Resistance level is the 15-month high of 1,230

Long opportunity

Daily FKLI chart as at 25 September 2009 using NextVIEW Advisor

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30-day Moving Average

Resistance Support

Daily FCPO chart as at 25 September 2009 using NextVIEW Advisor

points. At 1,221.50 points, there is still a little room for the index to pull back near the support level between 1,190 and 1,200 points. As momentum indicators are still bullish, a buy long opportunity is available at this range.

H o w e v e r, i f t h e F K L I breaks below 1,190 points and stays below it, the market is expected to correct further downwards to the next support level at 1,140 points.

Market volatility has slightly contracted as the market falls deeper into the correction with the 14-period Average True Range (ATR) currently reading 11.5 points compared to 13 points in the previous month. With this volatility, traders should not

put a stop loss lower than 11.5 points and for position trading, 1.5x ATR or 17 points, is preferable. The contraction of the FKLI trading range for the past two months also indicates that the market may soon move out of the correction.

Crude Palm Oil Futures (FCPO)

Price of FCPO was unable to stay above the uptrend line last month as the price continued to decline. The FCPO price fell RM169 per metric ton or 7.1% to RM2,186 in a month. FCPO and soy oil were going against the other commodities trend as the dollar weakened.

The price of FCPO found support at RM2,070. The price has been trading in

a range between RM2,070 and RM2,240 in the month of September. Exports slowed down as inventories were increasing in importing countries amid lower consumption.

The short-term trend is currently bearish and in a correction. The FCPO price is currently below the shortto long-term 30- to 90-day moving averages and these averages are declining. For the past two weeks when the price moved sideways, momentum indicators such as RSI and Momentum are diverging positively and this means that the bulls are dominating in the price correction although the readings are below the mid-level. A breakout above the mid-level on these indicators provides 11

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a good long opportunity.

There are two opportunities in trading the FCPO. One is for the short term and the other position trading. A short-term trader can buy and sell at support and resistance levels. Support level is between RM2,070 and RM2,100. A stop should be placed slightly below the support level of RM2,070.

The profit target should be at the resistance level between RM2,200 and RM2,230.

Traders can look into lower chart timeframes like the hourly chart to find good entry prices.

For position trading, the trader has to wait for a breakout of the support and resistance level. A breakout above the resistance level of RM2,230 provides a good long opportunity because the breakout will also cause momentum indicators to turn positive. The price may move to RM2,400.

H o w e v e r, a b r e a k o u t below the support level of RM2,070 would bring the price of FCPO lower to the next support level at RM1,990. The downside opportunity is small as compared to its upside potential and therefore a long trade is preferred. The 14-period Average True Range (ATR) indicator is RM65 points and the preferred stop loss for position trading is 1.5x ATR which is 98 points.

(From Pg 9)

DJI climbed 125.90 points or 1.3% in a month to close at 9,665.19 points.

The benchmark index went as high as 9,918 points but failed to hold after the FOMC meeting ended and the Fed announced that the US economy is on the road to recovery. Investors were quick to sell on news and the appreciating US dollar which caused commodity prices to decline added to the pressure.

Despite the selling pressure in the past few days, the technical indicators are still positive. Momentum indicators are on the positive side,

slightly above its mid-level.

The trend is still strong and intact. The market would remain bullish if it stays above the support level at 9,100 points.

There is a support from the short-term 30-day average which is currently at 9,550 points. The DJI is expected to test this moving average level and if it can stay above this level, we may see the trend continue and make new highs. Earlier, an inverted Head and Shoulder pattern was confirmed with a level objective of 11,600 points.

stay above it. Then, the next resistance level to test would be 23,800 points. However, if the market corrects further and the HSI breaks below the support level at 19,800 points, then it may fall further to 18,800 points.

US Dow Jones Industrial Average (DJI): Trend still strong and intact

Wall Street was bullish last month as investors anticipated a favourable outcome from the two-day FOMC policy meeting end-Sept. The

EPSEPS 73.345 – – 984.661 984.661.144 73.345 984.661 .144 1:5 – 114.797 1,110.615.187 114.797 1,110.6 .187 1,110.6 1:2 200.591 200.591 .259 15 1,765.835 15 .259 – – 156.831 156.831 – 1,765.8 1,765.8 *.2*.2

Support

Support is a price where traders and investors have shown a willingness to buy. Sometimes, lines are drawn from one support level to another to identify a line of support. This is sometimes called a trend line. Moving FOR YOUR INFO average lines are also used to identify lines for support. As long as the stock price trades above the trend line, the current trend remains intact. If price falls below the support line, then it is an indication that the trend may be reversing.

31-12-92 31-1292 31-12-93 31-1231-12-94 93 INTERIM

$12.00 $11.00 $10.00 $9.00 $8.00 $7.00

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Corporate Digest text : Stephen Chin

NAP and Proton

W

hile the nation waits with bated breath for the Budget 2010 to be tabled on 23 Oct, the automobile industry and analysts will be doubly interested as the review of the National Automotive Policy (NAP) will also be announced alongside the Budget. Topmost on their minds would be the fate of national carmaker Proton in light of pressure on the government to liberalise the industry and increase foreign investment.

AmResearch said the review would probably involve industry restructuring, including shifting emphasis to research and development (R&D) rather than attracting investments in the assembly of completely knockeddown (CKD) kits, to prompt more companies to set up manufacturing and assembly plants; providing better assistance to the auto parts sector; and offering incentives for the manufacture of environmental-friendly vehicles.

The NAP is expected to introduce incentives for car manufacturers to develop home-grown models, even those from non-national carmakers such as the Naza Group, UMW-Toyota and Honda Malaysia. It may

be geared to attract more value-added investments especially in product development from foreign carmakers, said OSK Research.

It said such a move would be positive as car manufacturers can respond quickly to invest and set up full-fledged manufacturing lines in the country. It would be particularly attractive to foreign carmakers that already have CKD assembly partnerships with local vehicle franchise holders. “They have a longstanding presence in the local automotive scene and understand market demand,” it said in a report.

Alternatively, auto manufacturers could leverage on these incentives for R&D while leaving full-scale manufacturing with Thailand, given that country’s ample production capacity.

AmResearch added that foreign alliances where a foreign partner could inject platforms for co-developing new car models with a local partner will bode well for Proton. “Proton would be among the most likely to benefit from the NAP review, especially with the policy expected to emphasise R&D. Proton is the only local auto player and only automaker in ASEAN with pure R&D capabilities and facilities,” it said.

Even if the carmakers set

up their own R&D plants in Malaysia, it is unlikely to be immediate. Proton may stand to benefit by providing a third-party engineering and crash test platform for other automakers, OSK Research said. Providing engineering services on long-term contracts can boost Proton’s revenue stream. Currently, most of Proton’s revenue generated in engineering services is believed to be related to its own product development.

With its accommodative foreign investment policy in the automotive sector, Thailand attracted virtually all the world’s major manufacturers, producing over 1.4m vehicles in 2008 and spurring the growth of parts manufacturers. To further consolidate its position, Thailand announced a new set of incentives in June.

OSK Research said Malaysia can compete head-on with the “Detroit of Asia” by relaxing conditions for foreign capital investment 13

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Higher-than-expected sales of Proton Exora

and offering more accommodative and longer tax holidays. This would woo foreign direct investments, create more technical skills and increase R&D-based employment opportunities.

The research house believes Proton will likely remain in a favourable position with the new NAP, given the government’s plans to launch a 1Malaysia racing team which will be engineered by Proton’s whollyowned Lotus.

The delay in the NAP, initially targeted for last year, may have worked in Proton’s favour, as it bought time for Proton to find suitable partners to strengthen its position.

Proton managing director, Dato’ Syed Zainal Abidin Syed Mohamad Tahir confirmed reports that a strategic partnership is currently in the works, hopefully to

be sealed before year-end.

Details of such a tie-up remain unclear but a platformsharing arrangement is very likely, possibly with Volkswagen or Renault.

Proton came close to finalising a partnership agreement in late 2007 but the deal fell through when Volkswagen wanted to take up an equity stake in Proton.

Khazanah Nasional, which is the major shareholder of Proton, rejected the proposal.

Volkswagen’s desire to gain control is understandable as it would enable the company to align its strategic objectives, prevent conflicts with local partners and prevent intellectual property infringements.

OSK Research said that Proton may be close to inking an equity partnership deal with a European manufacturer, suspected to be

Renault. However, it noted that Renault currently makes its Kangoo at Tan Chong’s assembly plant and its popularity in ASEAN is still too small to justify a large-scale production hub.

Proton is also said to be looking at a CKD manufacturing agreement with a local Indian manufacturer, similar to its present deal with China’s Youngman. Through its 55%-owned subsidiary Proton Parts Centre Sdn Bhd, Proton would supply CKD parts to the Indian party and get royalties in return.

The Indian partner can also access Proton’s engineering and development consultancy services.

Early this year, Volkswagen made the news again with plans to grow its ASEAN base, possibly by setting up a CKD assembly. OSK Research speculated that Volkswagen and Proton may

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come together again, possibly on a platform sharing deal to take advantage of Proton’s under-utilised manufacturing and R&D plant, in exchange for leveraging Volkswagen’s plant for Proton’s export markets.

Proton is currently carrying out feasibility studies to consolidate the operations of its Tanjung Malim and Shah Alam plants by early 2011.

The Tanjung Malim plant is estimated to be operating at 40% capacity. Shifting manufacturing from Shah Alam would free it up for new production lines with foreign partners should strategic partnerships materialise.

Presently, only the Saga is being produced in Shah Alam, while other models have been phased out and production of the Waja is ending sometime after mid2010, when it will be replaced by a rebadged Lancer Fortis.

OSK Research said, even with a strategic partnership, if the proposed NAP incen-

31-1231-12-92 92 31-12-93 31-1231-12-94 93 INTERIM

EPSEPS 73.345 – – 984.661 984.661.144 73.345 984.661 .144 1:5 – 114.797 1,110.615.187 114.797 1,110.6 .187 1,110.6 1:2 200.591 200.591 .259 15 1,765.835 15 .259 – – 156.831 156.831 – 1,765.8 1,765.8 *.2*.2

tives prompt manufacturers to set up production lines in the country, Proton could also dispose off its Shah Alam plant at a gain, or at worst, with a marginal loss, to unlock some cash.

Proton has recently been the subject of takeover rumours from various local parties. One, related to a management buyout by its own managing director was nipped in the bud very early by the company.

Others, such as bids from the Al Bukhary Group and a collaboration between Yasmin Holdings (whose vicechairman is former Proton pioneer Dato' Kisai Rahmat) and Naza Group continue to persist. To date, Khazanah Nasional holds a 42.74% stake in Proton at a cost between RM7 and RM8 per share, which is significantly higher than the prevailing market price. It has not indicated any interest in selling.

The Edge weekly reported that Tan Sri Syed Mokhtar Al-Bukhary had submitted

a bid to purchase a block of Proton shares from Khazanah. However, this will not trigger a mandatory general offer. (See our “Just Say It” column for another perspective on this).

Proton was a surprise performer during the last reporting season, by turning in a 1Q10 performance that put it back in the black, with a slight improvement over the previous year’s results. Net profit for 1Q10 ended 30 June, came in at RM54.6m (+4.85% y-o-y).

The results were due to higher-than-expected sales of its newly-launched multipurpose vehicle, Exora and higher margins.

August figures, however, showed Proton sales falling sharply by 16.3% m-o-m, dragged down by the 18.3% m-o-m drop in Saga sales.

OSK Research said this is possibly due to renewed competition from Perodua which launched a new facelifted variant of the Viva in June.

Margin Account

A leverageable account in which stocks can be purchased for a combination of cash and a loan. This allows investors to buy securities by borrowing money from a broker. The margin is the difference between FOR YOUR INFO the market value of a stock and the loan a broker makes. The loan in the margin account is collateralized by the stock and, if the value of the stock drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. The demand for additional funds by the broker because of adverse price movement is termed “Margin Call”. $12.00 $11.00 $10.00 $9.00 $8.00 $7.00

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Perspective text : Securities Commission Malaysia

What a Company’s Financials Can Tell You as an Investor

U

nderstanding the financials of a company is an important process when investing in the stock market.

After all, one of the key drivers of a company’s value is its current and expected future financial performance. A good understanding of how a company has performed in the past will help you gain insight into its financial health. And while past performance is not necessarily an indication of how it will do in the future, it will help you understand the influencing factors.

One key tool used in analysing the financial statements of a company is ratio analysis. Ratios are calculated from current year figures and

compared against previous years, other companies, the industry or even the economy in order to evaluate a company’s performance. There are many ratios available and the importance of a particular one can vary depending on the industry of the company you are looking at. To understand the significance of ratios, let’s take a look at the components of a financial statement.

There are four main parts to a financial statement: (1) Balance Sheet; (2) Income Statement; (3) Cash Flow Statement; and (4) Statement of Changes in Equity. It is important to remember the four parts are all inter-related and what happens in one will have an impact on another.

Together, they offer a great

Ratio Gross Margins

Calculation Gross Profits / Net Revenues

Operating Margins

Operating Profits / Net Revenues

Earnings Per Share (EPS) PAT / Weighted Average Number of Shares Price Earnings Ratio (PE)

Share Price / EPS

Receivables turnover

Net Revenues / Average of Current Year and Previous Year’s Accounts Receivables

Gearing

Total Debt / Total Shareholder’s Equity

Interest coverage

Earnings Before Interest and Tax (EBIT) / Interest Expense

Table 1: Ratios

more insight than they could individually hope to.

The Income Statement gives you information on how much revenue was generated in a particular period and the costs associated with the generation of that revenue. One key item we can pick up here is the company’s profitability.

There are various levels of profit and you will find that the further down the Income Statement you go, the more costs are deducted until you arrive at the profit after tax (PAT) at the bottom.

Typically, we’d gauge performance by looking at revenue growth and profitability ratios (see Table 1) for the year and comparing them to previous years as well as competitors. Declining revenue

Significance Increasing gross margins usually are an indication that a company is either managing its cost of goods/sales well, or able to charge a premium for its products/services.

Improving operating margins suggests that a company has managed its operational costs well EPS is an indicator of how much earnings are attributable to each share in the company during the year. Usually available at the bottom of the Income Statement This is compared with the PE ratio of competitors, and the market as a whole to get a sense of whether the share is trading below or above market valuations.

Indicator of how effective a company is in giving its customers credit terms and subsequently collecting on them. A high ratio implies that a company is efficiently collecting its debts or operates on a cash basis.

A company with high gearing is usually considered more susceptible to a downturn in the business cycle as it is required to continue servicing its loan, even though its sales may have dropped Indicator of ability to service the interest on outstanding debts. A ratio below 1 implies that a company is not generating sufficient income to service its interest expense.

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Sources of Financial Information

Availability

Annual Audited Accounts

Within 4 months from the close of the financial year

Annual Report

Within 6 months from the close of the financial year

Quarterly Report

Within 2 months after the end of each quarter of a financial year

Research Report

Within 2 months after the end of each half of the financial year (applicable only for MESDAQ-listed companies)

Table 2: Primary Sources of Financial Information

growth could signal that the company is finding growing its sales challenging, especially if competitors and the market size continue to grow. Look out also for any “extraordinary items” which may disguise a bad year, including one-off items that may boost the profits for the year such as selling its assets and recording a gain on disposal.

The Balance Sheet provides you with details of the company’s assets, liabilities and shareholders’ equity at a certain point in time. The relationship between the 3 elements can be summed up as follows: Shareholders’ Equity = Assets – Liabilities, or, “what you have minus what you owe is what you’re worth”.

Assets and Liabilities are further categorised into Current and Non-Current. Current assets refer to any assets which the Company expects to convert to cash within 12 months, while current liabilities refer to any obligations which are expected to be settled within the next 12 months.

Shareholder’s Equity reflects the total amount of capital the shareholders have provided and includes any profits made since the inception of the Company which have not been paid out as dividends.

The movement during the year of this account is reflected in the Statement of Changes in Equity. See Table 1 for a summary on Receivables Turnover, Debt-to-Equity, and Interest Coverage Ratio.

The Cash Flow Statement shows you the inflows and outflows of cash in the company and is categorised into Operational, Investing, and Financing cash flows. Be wary of relying purely on a positive net cash flow as this could be a result of a cash injection from a loan or from shareholders (Financing cash flow). Operational cash flows show you how much cash a company is generating from its operations. In general, increasing operational cash flows are good. Investing cash flows show you how much cash has been spent on assets which can generate income (e.g. machinery) and acquisitions and accordingly, are typically negative.

In addition to the four parts mentioned so far, another area of interest is the Auditor’s Report, especially where their opinion is “qualified”.

This means that there are factors which do not allow the auditor to complete the audit (for example, lack of documentation to substantiate

certain revenues) or that the company has deviated from generally accepted accounting principles.

Do also read the Notes to the Financial Statement and the Management Discussion/ Result Analysis sections. These are packed with information and can help you make sense of the trends you’ve picked out from the ratios.

Finally, remember that depending on your investment objectives and risk profile, different information will hold greater significance. For example, if you’re retired, have a shorter investment horizon and are looking for a steady stream of income, then indicators such as a stable revenue and profit growth trend, consistency in financial performance, and good (regular) dividends would be of interest.

If you have a longer investment horizon, a company which is currently not very profitable may not faze you as you are more interested in the earnings potential of some key project they have in development. Whatever your investing profile may be, a basic understanding of a company’s financials is important to ensure you at least ask the right questions.

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9/30/09 1:22:32 PM

Just say it text : Ameer Ali Mohamed

Ameer Ali Mohamed is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.

BETWEEN CONTINUITY AND GROWTH

S

hould ownership and control of the national car manufacturer Proton be maintained by Khazanah Nasional or any other investment arm of the Malaysian government, or should it be sold to the private sector for the sake of competitiveness and growth?

Just before the Aidil Fitri festivities, speculations were rife that at least two parties were interested to take over control of Proton. A local daily reported on 15 Sept that lowprofile tycoon Tan Sri Syed Mokhtar Shah Syed Nor, or more popularly known as Syed Mokhtar Al-Bukhari, was eyeing a controlling stake in the national automaker.

Also in the running, according to the report, was Proton’s former engineering director who was also one of the pioneers in the company, Dato’ Kisai Rahmat who is now vicechairman of Yasmin Holdings, which is speculated to team up with the Naza Group to launch a bid for Proton.

Speculation has it that Syed Mokhtar’s bid is more advanced in that he might have

submitted his proposal to Khazanah. One of the methods is for his 55.9%-owned listed DRB-Hicom to take over the controlling stake in Proton.

And the best part is that the above speculative news was printed just three days after a news report quoting Proton managing director Dato’ Syed Zainal Abidin Syed Mohamad Tahir as saying that the company was in discussions with a foreign car company on a strategic alliance, targeted to be concluded by year-end.

Whether the 15 Sept speculative news was meant to question Proton’s yet another mission to have a foreign strategic partner remains to be seen. Nevertheless, it definitely reminded the controlling shareholder Khazanah of the availability of two options – sell a controlling interest to either one of the two local interested parties or form a tie-up with a foreign partner while maintaining the stake.

A check on Bursa Malaysia website shows that neither DRB-Hicom nor Proton has made any announcement either confirming or rejecting the speculated takeover interest.

What has happened however is that Proton share price soared from RM3.71 closing on 14 Sept to an intra-day high of RM4.60 on 23 Sept before settling at RM4.22 on 25 Sept. Minority shareholders should be informed whether or not there is any foundation to the printed speculative news.

Proton was formed in the 1980s during former Prime Minister Tun Dr Mahathir Mohamad’s time. A government stake in the national automaker then was paramount to achieving the strategies of the country’s industrialization process. As the targeted year for Malaysia to become a developed nation is only 10 years from now, many would argue that it is now time for Proton to be privatized for the sake of achieving competitiveness hence growth.

However, proponents of such a scheme should also consider the importance of continuity when it comes to a national project. We have seen many instances where privatized public entities sold to individuals were later repurchased by government investment arms for one rea-

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son or the other.

Despite having a golden share which gives the government veto powers in matters of national strategic interests, the controlling stake of Malaysia Airlines was returned to the government after being

sold to an entrepreneur a few years earlier.

Proton also has the same line of story but for a different reason. DRB-Hicom, when it was controlled by the late tycoon Tan Sri Yahya Ahmad (11 Aug 1947 – 8 Mar 1997), used

Proton Holdings Berhad Share Capital as at 30 June 2009 Issued and Fully Paid-up Capital

RM549.2 million

Substantial Shareholders as at 30 June 2009 Khazanah Nasional Berhad

42.74%

Employees Provident Fund Board

15.90%

Petroliam Nasional Berhad

7.85%

Source: Proton 2009 Annual Report

DRB-Hicom Berhad Share Capital as at 24 July 2009 Issued and Fully Paid-up Capital

RM1,933.2 million

Substantial Shareholders as at 24 July 2009 Tan Sri Syed Mokhtar Shah bin Syed Nor*

55.92%

Employees Provident Fund Board

9.97%

Khazanah Nasional Berhad

5.39%

* By virtue of his deemed interest in the shares through Etika Strategi Sdn Bhd in accordance with Section 6A of the Companies Act, 1965 Source: DRB-Hicom Annual Report 2009

Data International Reserves

to hold a 27% equity interest in Proton. Petroliam Nasional or Petronas later bought over the stake in 2000.

Any national project should not be at the mercy of anything – be it certain individual, group or the greatest inevitability, i.e. death. Discussion on death may be taboo for some but that is the only certain thing in life.

But a government will never die, although the executors will be replaced from time to time. While companies such as Proton should strive to offer excellent products and above average after-sales service to clients and acceptable profitability to shareholders, it also has corporate and social responsibilities, especially in supporting the growth of the ancillary industries related to the automotive industry.

Hence, creating not one but a number of strategic alliances appear to be a better alternative to Proton as it ensures continuity. While the Malaysian government continues to control the company, at the same time it has strategic partners for its products.

Reference

Scheduled Released Dates

as at 30 Sep 2009

7 Oct 2009

External Trade

Aug 2009

8 Oct 2009

Index of Industrial Production

Aug 2009

12 Oct 2009

Salaries / Wages (manufacturing)

Aug 2009

19 Oct 2009

Consumer Price Index

Sep 2009

21 Oct 2009

International Reserves

as at 15 Oct 2009

22 Oct 2009

8/2009

28 Oct 2009

Sep 2009

30 Oct 2009

Monetary Policy Statement Producer Price Index Malaysia Economic Diary

Source: Websites of Department of Statistics of Malaysia and Bank Negara Malaysia

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INVESTORS’ CORNER

compiled : Stephen Chin

Content cost eats into Astro’s profit ASTRO ALL ASIA

Astro reported 1H10 core net profit of RM73.4m (-42% y-o-y) after normalising the impact of legal expenses relating to its arbitration proceedings. Revenue grew 4% y-o-y to RM1.5b.

Astro added only 53k net subscribers in 2Q10, its lowest in eight quarters due to a high churn rate of 11.9% caused by recession and the absence of major sporting events (there was no English Astro All Asia (FY Jan 2010) Research dated Forecast EPS 10 (sen) PER 10 (x) Forecast DPS 10 (sen) Div. Yield 10 (%) Call Target price (RM)

Premier League football from May to July).

The broadcaster will spend RM100m in one-off HDV expenses in 2H10 and invest an extra RM100m in HDTV capex this year. Maybank Investment Bank estimated content cost to comprise 36% of TV revenue (from 35%). It said content cost may rise further as the bidding for English Premier League broadcasting rights for 2010/12 starts end-SepMaybank Investment Bank 11 Sept 2009 5.70 63.0 9.9 2.7 Sell 3.26

Share price as at 25 Sept, 2009: RM3.60

tember.

OSK Research noted that revenue growth slowed to 3% y-o-y in 2Q10 from 6% yo-y in 1Q10 due to weak subscriber addition and lower ARPU from higher marginal subscriptions added and subscriber downtrading activities. Despite a 2%-points rise in EBITDA margin q-o-q to 23%, headline earnings still fell due to higher interest expense (+78% q-o-q).

Astro declared an interOSK Research 11 Sept 2009 13.9 25.8 10.6 2.9 Neutral 3.88

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IJM Corporation (FY Mar 2010) Research dated Forecast EPS 10 (sen) PER 10 (x) Forecast DPS 10 (sen) Div. Yield 10 (%) Call Target price (RM)

Maybank Investment Bank 18 Sept 2009 34.3 18.9 14.8 2.3 Buy 6.30

im dividend of 2.5 sen per share.

payoff stands at RM0.28.

“We advise investors to subscribe for the warrants.

The five-year duration is another plus,” it said.

IJM also recently accepted a Letter of Intent (LoI) for a highway construction project in Maharashtra, India, valued at RM327m. Work on the four-lane Pune Solapur section of the NH9 highway is expected to take 27 months to complete.

Once officially awarded, the LoI will would increase IJM’s outstanding order book to about RM4.3b. Maybank IB said, assuming a net margin of 5%, the project would translate into a net profit contribution of RM16m over FY10-12.

Share price as at 25 Sept, 2009: RM6.50

IJM CORPORATION

IJM has received approval from Bursa Malaysia for its 2-for-5 bonus issue and 134.9m new warrants rights issue. The five-year warrants will be issued at 25 sen each, with an exercise price of RM4 (ex-bonus).

Its management expects the entire exercise to be completed by end-October 2009. Each warrant entitles the holder to one IJM share at the exercise price.

OSK Research said based on IJM’s closing price of RM6.23 on 11 Sept, the ex-bonus price would be RM4.45, indicating that the warrants are in the money.

Including the cost of warrant at RM0.25, the warrant payoff is RM0.20. On a cumbonus basis, the warrant SP Setia (FY Oct 2009) Research dated Forecast EPS 09 (sen) PER 09 (x) Forecast DPS 09 (sen) Div. Yield 09 (%) Call Target price (RM)

SP SETIA

SP Setia recorded a 3Q09 net profit of RM42.7m (+4.5% y-o-y, +5.3% q-o-q) on turnMaybank Investment Bank 18 Sept 2009 16.4 25.6 11.5 2.7 Sell 2.90

Share price as at 25 Sept, 2009: RM4.20

OSK Research 11 Sept 2009 33.5 19.4 11.8 3.1 Neutral 6.21

over of RM317.1m (+4.8% y-o-y, +2.1% q-o-q). The company’s improved sales came from its “5/95 home loan package” campaign and three new project launches – Setia Walk’s service apartments, Setia Sky Residences and Setia Vista.

Maybank IB noted that of the RM1.25b in new sales for 9M09, most were to replenish a depleting order book since 2Q08. As at 31 July, 2009, unbilled sales (excluding associates), estimated at RM1,054m, provide less than one year’s (FY08) earnings visibility, it said.

SP Setia’s 4Q earnings is expected to jump, Maybank IB said, due to new sales made in 2H09, deliveries of completed homes in 4Q09 (which correspond with the massive number of launches in 4Q07) and disposal gain of land at Setia City.

OSK Research 18 Sept 2009 14.1 29.8 11.5 2.7 Sell 3.47

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Across the causeway text : Wyai Kay

Mary Chia’s

S

Beauty Regime

ingaporeans are definitely no strangers to Mary Chia, the beauty chain, as well as its eponymous founder. The company, then in 1988, broke new ground when it incorporated slimming services at its beauty practice in Yishun.

The move proved momentous, as from here, 14 more outlets would follow. 20 odd years later, Mary Chia Holdings (MCH) ushered in a new era in its corporate history as it took the leap to go public.

As a business, MCH is probably as straightforward as one can get. There are no marked-to-market derivatives to value, no complex hedging mechanisms and revenue is recognised when services are

rendered – plain and simple.

These are virtues to behold, made more so in uncertain times. So it is probably as good a time as any for this iconic homegrown beauty and wellness chain to launch its IPO, in spite of the challenging economy.

Wendy Ho, the founder’s daughter and CEO, said that plans to go public have always been an objective. “We feel ready, and we want to expand, organically as well as through acquisitions,” she revealed.

Established Brand Name

In an ultra-competitive industry, its recent Catalist listing will no doubt serve to strengthen brand awareness.

However, what MCH has going for it was built up way before this. Through the years,

its name has became synonymous with that of beauty, an image entrenched through conscious marketing efforts to position itself at the top end of the market.

But such is the fortitude of its founders that it has not shied from further diversifying to tap new trends and income segments. “In Singapore we will expand through bringing in new brands and new concepts,” Ho explained.

Besides its 10 Mary Chia lifestyle and wellness centres located across the island, the group also operates four outlets under the Urban Homme brand, which targets the metrosexual male.

While these outlets are a picture of opulence, its latest concept store, Mentsu, which

22

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9/30/09 10:53:07 AM

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